Market Assessment of Company Performance

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Abstract
This chapter considers whether or not share prices reflect company performance and prospects. Many believe otherwise, therefore the chapter investigates the arguments as to why this is the case before comparing them against the large body of evidence on how share prices are determined. Next, the chapter looks at the functions of the stock-market and what market prices ought to reflect, before briefly reviewing the evidence on stock-market efficiency. The chapter then turns to issues of short-termism, dual pricing, and the closely related issue of whether takeover activities reveals market inefficiencies. Afterward, the chapter puts forward a number of possible reasons as to why the workings of the stock-market are so poorly understood by many businessmen and policy makers. Lastly, the chapter looks at the ways in which the stock-market could be made more efficient in terms of its assessment of corporate performance.

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